Schork Oil Outlook: Forward Curves Show Pending Weakness
Forward curve showing little concern regarding availability of future supplies.
You can’t swing a cat without hitting a barrel of oil in the U.S… Not that Wall Street would tell you!
We will have to wait until the end of this month for the latest monthly update from the DOE, but suffice it to say, the preliminary (weekly) numbers show inventories of crude oil and petroleum products at the highest levels in over a generation. For instance, in between May and June a 0.3% year-on-year deficit in commercial crude oil stocks morphed into a 3.9% (p) surplus in June. Furthermore, supplies in July will likely finish the month over 355 MMbbls… the first such occurrence since 1990.
Meantime, with only a few weeks remaining in the summer driving season stocks of gasoline are more than comfortable. Stocks were virtually unchanged last week when we normally see a drawdown in excess of 2.0 MMbbls for this report. As such, stocks will finish the month of July above 220 MMbbls for the first time since 1989 and we will head towards the end of the season — the Labor Day holiday on September 06th — with around a 5% cushion to a year ago.
Finally, last week supplies of distillate fuels rose to the highest high since January 1983, 174.2 MMbbls. Furthermore, stocks potentially ended July above the 170 MMbbl benchmark for the first time since 1981!
Little wonder then that the forward curves in London and New York are showing pending fundamental weakness. For instance, since the end of the winter the discount (contango) on crude oil for delivery against the NYMEX contract for October 2010 compared with the contract for October 2011 delivery has dropped from $1.01 a barrel to $5.83.
Whereas a $5.83 premium for barrels not due for another year is not enough to carry the inventory, the 477% increase in that premium is a clear signal that the market is not concerned regarding the availability of crude oil today, tomorrow and at least into the fall. This is not how a fundamentally strong market behaves, i.e., as contract expiration nears, value decreases relative to the deferred contracts.
In London the steepening in the contango on the ICE Brent curve has not been as severe as that in New York, but the point is, it has steepened. Thus, The Schork Reportis advising, Wall Street’s sermonizing to the contrary, that the forward curve in price is showing little concern regarding the availability of future supplies.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.